Doctors can harm or even kill patients by giving the wrong dose of the wrong drug to the wrong patient. Suppose that because of the danger of drugs, doctors were forbidden from giving any drugs to any patients. If drugs were stored on shelves over the patients' beds in the hospital, then some doctors might discover that by slamming doors in the hospital, they might cause some drugs to fall off the shelves into the patients' mouths, and might occaisionally cure a patient. This could lead to a "science" of curing disease by slamming doors.
Curing disease by slamming doors is obviously absurd. It is less effective than giving drugs to patients, and is even more dangerous because it is more likely to give the wrong dose of the wrong drug to the wrong patient.
Slamming doors is not a way of curing disease. Slamming doors is a way of evading the prohibition on giving drugs. But if it is so important to give drugs to patients that doctors must find ways to evade the prohibition on giving drugs, then the prohibition on giving drugs should be repealed instead.
Monetary policy is conducted in a way which is just as absurd as curing disease by slamming doors.
Monetary policy is how much money the government adds or removes from the economy. Government spending adds money to the economy. Taxes remove money from the economy. When the government borrows money, that removes money from the economy. When the government lends money, that adds money to the economy. Monetary policy may consist of making sure that money added to the economy equals money removed from the economy; this is a policy which works moderately well most of the time. The government always has a monetary policy, even when the government does not intend to have a monetary policy.
If the government adds too much money to the economy, the result is inflation. If the government removes too much money from the economy, the result is deflation and a depression. Monetary policy is very dangerous because bad monetary policy can destroy the economy.
History shows that inflation occurs more frequently than depressions. This is because adding money to the economy is easier than removing money from the economy, and because government officials are more willing to add money than to remove money.
The government can easily add money buy creating more of whatever is money. If money is coins, the government can create more coins by clipping or debasing the coinage. If money is paper, the government can print more.
But if the government wants to remove money from the economy, the government must send people out to find money. An uncivilized government collects money by sending soldiers out to collect whatever money the soldiers can find. But when the peasants hear that soldiers are searching the countryside for money, the peasants will hide their money, and the soldiers will find very little money. A civilized government will try to collect money through taxation. But the tax collectors must be hired, trained, paid, and managed; and taxpayers hide their money from tax collectors. Taxation is more efficient and more fair than plunder, but it is not any easier.
When the government adds money to the economy, the government must give the money to people. This will please the people who received the money, and they will probably reward the government with campaign contributions and reelection. Corrupt government officials may add money to the economy by giving the money to themselves. Thus the government is always looking for an excuse to add money to the economy.
When the government removes money from the economy, the government must take the money away from people, which will make the people angry at the government, and may result in the government not being reelected, and may even result in a revolution. Thus the government is usually reluctant to remove money from the economy.
Since the government is biased towards inflation, limits on the power of government to add money are more important than limits on the power of government to remove money. The simplest way to prevent the government from adding money is to use something which is difficult to duplicate as money. For example, there was a pacific island which used carved boulders as money. The boulders were dug up and carved on one island, then moved by boat to another island, then dragged to the top of a mountain. Everyone knew which boulder belonged to which person. Ownership of the boulders could be traded without any need to move the actual boulder. It was difficult to have inflation in this economy because it was difficult to put more boulders on top of the mountain. This system obviously would not work on a large scale because it would be too difficult for everyone to know the ownership of every boulder. I don't remember the name of the island, but it might have been Nauru.
The best example of inflation resistant money is gold. The government cannot create more gold out of thin air on a whim.
The government can remove gold from the economy by collecting gold and storing gold in a secure place like Fort Knox. The government can add gold to the economy by removing gold from storage and distributing the gold to people. But once the gold warehouses are empty, the government cannot add any more gold to the economy. The power of the government to add gold to the economy is limited. Furthermore, most people interpret full gold warehouses as a sign of good government, and empty gold warehouses as a sign of bad government. This limits the willingness of the government to add gold to the economy.
The advantage of using gold as money is that it is difficult for the government to manipulate the amount of gold in the economy. The disadvantage of using gold as money is that it is difficult for the government to manipulate the amount of gold in the economy.
For example, in 1492 Christopher Columbus sailed from Spain to the caribbean islands. Soon after this, Spain conquered the Aztec and Inca empires, including several gold and silver mines. Soon after this, the mercury process was discovered for refining gold and silver, which made it much easier to mine gold and silver. There was a big increase in the amount of gold and silver produced by latin american mines, and most of this gold and silver was transported to europe and added to the european economy. Adding money to the economy causes inflation, so prices rose in europe. Prices did not rise rapidly, but prices kept rising for a hundred and fifty years after Columbus. Prices kept rising until latin american gold and silver production declined. The europeans did not understand why prices were rising when prices had not risen for hundreds of years. The predictable result was numerous futile and counterproductive campaigns against price increases, speculation, and greed.
On the other hand, the sixteenth century european inflation did not harm europe. The people who had to pay higher prices were angry, but other people benefited from higher prices. The extra gold and silver in the economy did not affect food production, so people had the same amount of food to eat. The extra gold and silver in the economy made gold and silver jewelry more common, so people had a little more beauty in their otherwise bleak lives. The real affect of the gold and silver added to the european economy was that people had the same amount of food and a little more jewelry. So despite the inflation, people were not worse off, people were actually better off, but not by much.
On the other hand, maybe imperialism diverted some workers from food production to conquest, resulting in less food production, so maybe there was less food.
The european governments could have stopped the inflation by collecting the extra gold and silver and storing it somewhere, but the european governments did not know this, and it was too difficult. If the european governments had removed the extra gold and silver from the economy, the people would have been worse off. The cost of collecting and storing the extra gold and silver would have make europe poorer. People would not have gotten to have a little extra jewelry.
The unprecedented and unexplained european inflation of the sixteenth century forced people to question their traditional assumptions, which may have caused people to become more open minded, which may have contributed to the scientific revolution and the general advance of civilization which occurred in europe thereafter.
Because of the rising prices, agricultural landlords needed to raise rents, but faced enormous pressure to not raise rents. So instead agricultural landlords evicted the tenant farmers and farmed their land themselves using hired labor. The new landlord farmers were more interested in new labor saving high tech farming methods than the old tenant farmers. The settled tenant farmers were converted into migrant temporary agricultural laborers. Cut loose from their roots, many migrated to the cities for higher paying factory jobs.
Many people assume that the landlord farmers' preference for labor saving methods was because the rich educated elite farmers were smarter than the stupid ignorant peasants. This is wrong. The primary resource possessed by a small family tenant farmer is the labor of the family. To be successful, a small family farmer must make maximum use of available resources. A small family farmer must use all the labor of the whole family. Free time is wasted labor. Maximum efficiency occurs for a small family farm when work takes exactly all day. If work takes more than all day, there isn't enough time to work the whole farm; part of the farm is going to waste. If work takes less than all day, then the farmer could be farming more land; labor is going to waste. If an efficient small family farmer buys labor saving equipment, there will be the cost of the labor saving equipment, no change in income, and the free time gained will go to waste; the farmer will be worse off. A small family farmer has a fixed labor force and a fixed amount of land. The small family farmer needs to choose the correct amount of labor saving methods so that land and labor are matched. It is stupid to invest in labor saving methods unless you have an opportunity to lay off workers or farm more land. The landlord farmers were more interested in labor saving methods because the landlord farmers had more opportunities to lay off workers. The landlord farmers were smart to adopt labor saving methods quickly, and the small family tenant farmers were smart to adopt labor saving methods slowly.
This applies to all businesses. Any business which cannot easily expand and which cannot easily lay off workers should not invest in labor saving methods.
Another example of problems caused by gold money is the great depression of the 1930s. During the 1920s, the world economy expanded, which resulted in an increased demand for gold. Mines did not produce enough gold to meet the demand. The result was a gold shortage, which was a money shortage, just as if the government had removed gold from the economy. This caused prices to fall, which caused the great depression. The predictable result was numerous futile and counterproductive campaigns against price decreases, speculation, and greed.
When the economy expands, the amount of money in the economy needs to expand also, or else prices will not be stable.